Aug. 28 (Bloomberg) -- Australia abandoned its attempt to
set a minimum price for carbon permits and agreed to begin
linking to the European Union market by mid-2015, laying the
groundwork for global emissions trading.

EU carbon allowance rose to a two-month high after
Australian Climate Change Minister Greg Combet said the two
programs will have their first links as of July 1, 2015, and a
full tie-in three years later. Businesses will be able to
buy carbon units immediately from the EU system to comply with
Australia’s new emission restrictions, he said.

“This is the first step toward a truly global trading
system,” said Alex Wyatt, the Melbourne-based chief executive
officer of Climate Bridge, a developer of projects that produce
global offsets. “This provides clarity on the Australian scheme
and enables liable entities to determine hedging and purchase
strategies.”

Prime Minister Julia Gillard has struggled to defend a
carbon price more than twice as high as the one in Europe. While
Gillard won political support by agreeing to a fixed price on
carbon for the next three years, she’s backing down under
pressure from business on a price floor of A$15 ($15.90)
established last year for the cap-and-trade system starting
in 2015. Australia also is restricting access to the global
offsets from the United Nation’s Clean Development Mechanism.

The EU, which started the world’s largest carbon cap-and-trade plan in 2005, is following through on a commitment earlier
this year to work with Australia and other nations to set up an
international network of linked emissions-trading programs by
the middle of this decade. Australia started its program this
year and will maintain a fixed price for CO2 discharges until
the markets are linked.

Delivering ‘Certainty’

“This delivers certainty to businesses that will have a
liability under the Australian scheme because they will have
access to the largest carbon market in the world,” Combet told
reporters in Canberra today. “This is the best sort of
confidence, market confidence that you can deliver.”

Australia’s fixed price on carbon was set at A$23 a metric
ton for about 300 of its largest polluters on July 1. It will
rise at a predetermined-rate of 2.5 percent a year in real terms
until 2015. The carbon price is Gillard’s main tool for reducing
Australia’s reliance on coal and meeting its target for a 5
percent cut in greenhouse gas emissions from 2000 levels by 2020.

“In the discussions we had with the business community,
there was an issue in relation with the floor price,” Combet
said. “Business would prefer a fully flexible market price.
They deal with it every day with the exchange rate, commodity
prices and a host of other things.”

EU Permits Rise

The EU system is based on the cap-and-trade principle and
doesn’t allow any minimum prices. The system covers around
12,000 utilities and manufacturers and expanded this year into
the aviation industry.

EU permits for delivery in December rose as much as 3.7
percent to 8.46 euros ($10.56) a metric ton on the ICE Futures
Europe exchange in London and traded at 8.42 euros at 8 a.m. The
contract has lost 41 percent in the past year as an economic
crisis curbed demand for pollution rights and exacerbated
oversupply of allowances.

The EU is considering tools to improve its carbon program,
including an option to delay sales of a yet unspecified number
of permits as of 2013. That would help the price rebound from
the current levels, which the bloc’s Climate Commissioner Connie
Hedegaard and Energy Commisioner Guenther Oettinger have said
fail to encourage investment in clean technologies.

‘A Lot Cheaper’

“Buying an EU allowance at current prices is a lot cheaper
than doing domestic abatement in Australia, so I would expect
some demand once the market starts to trade,” said Seb Henbest,
a Sydney-based analyst for New Energy Finance.

Any bigger purchases by Australian companies are unlikely
for the moment as domestic political uncertainty is still
hamstringing the development of the market, he said. Firms
should look to buy either EU or UN credits as early as possible
as they are likely to be cheaper than the domestic carbon price,
according to Henbest.

Australia agreed to a “sub-limit” on UN-sponsored
emission credits, including Certified Emission Reductions, known
as CERs. While companies in the Australian program will still be
able to use international carbon units to meet up to 50 percent
of their liabilities, the ceiling for the use of UN credits will
be 12.5 percent, Combet said.

Higher Prices

UN CERs for delivery in December rose as much as 7.4
percent and traded at 3.1 euros a metric ton at 8 a.m. They
were down 69 percent in the past 12 months.

The EU and Australia aim to agree registry arrangements for
the interim link by mid-2013, according to a statement published
today on the EU website.

The changes to the Australian system will involve “minor”
legislative amendments, Combet said. They have been agreed to by
the Greens and independents, who the ruling Labor minority
government relies upon to pass laws, he said. The agreement with
the EU paves the way for potential linking with carbon-trading
markets in the Asia-Pacific, he said, without elaborating.

Tony Abbott, the Australian opposition leader whose
Liberal-National coalition leads polls ahead of elections that
must be held by November 2013, has vowed to repeal the so-called
carbon tax should he win power.

Treasury forecasts the carbon price will reap A$24.7
billion in revenue within four years. Greens leader Christine
Milne, whose party supports the laws and holds the balance of
power, told reporters today’s announcement means carbon pricing
will be “embedded” into Australia’s financial system.

“Abbott may have backed himself into a corner, ” said
Nick Economou, a political analyst at Monash University in
Melbourne. “Economic rationality doesn’t come into it. It’s all
about politics. For him to fulfill his promise of scrapping the
carbon tax would have legal implications and financial
implications from the lost revenue. His credibility wouldn’t be
sustained if he wasn’t at least seen to try to get rid of it
should he win power.”